Jobless Claims Data (Still) Suggest Modest Job Growth Ahead

Today’s weekly jobless claims report seems to be telling us that the labor market isn’t fatally wounded. New filings for unemployment benefits fell 12,000 last week to a seasonally adjusted 377,000. That’s not far from the post-recession low of 361,000 in mid-February, when optimism was considerably stronger about the economy’s prospects. One good report in the weeks ahead could take us to a new low and revive expectations that the future looks okay after all. Analysts are inclined to think otherwise, however, courtesy of the disappointing employment report for May. But today’s claims update suggests that maybe, just maybe, it’s too soon to write the obituary for economic growth.

The operative question: If recession risk is high and rising, would the danger be conspicuous in jobless claims? If the answer is “yes” (and it probably is), then there’s at least one good reason for thinking that the business cycle may not be destined to turn dark just yet. You can’t rely on one indicator for reading the broad economic trend, but in the grand scheme of looking for major turning points in the business cycle there’s a strong case for expecting jobless claims to drop early clues about what’s coming. History tells us that jobless claims are usually rising sharply either just ahead of or in the early stages of NBER-dated recessions. The good news is that it’s hard to make that case with the latest numbers. As the chart below shows, the worst you can say about jobless claims is that they’ve been going sideways. That may bring trouble later in the year, but in the here and now the claims numbers are effectively saying that recession risk is still relatively low.

What about the recent pop in claims numbers in April? That was an early warning sign that the labor market’s growth rate hit a rough patch. Is the slowdown in job growth temporary? The jury’s still out on a definitive answers, but it’s certainly encouraging to see that jobless claims have fallen again since the rise in April. If a recession was imminent, it’s likely that the April increase would have kept on going.

Skeptics may argue that the seasonal adjustment in the claims data masks a much darker picture. But that argument doesn’t hold up if we look at unadjusted numbers on a year-over-year basis. As the second chart reminds, claims continue to drop at a healthy pace of around 10% a year. If and when the economy stumbles to the point that a recession is near, the unadjusted annual change rate will quickly rise to zero and above on a sustained basis. For now, we’re still well under that danger zone.

Yes, it could all suddenly change next week, next month. And to be fair, there are other indicators that are flashing warnings. But if we take the claims data at face value, it’s telling us that employment growth has only slowed. If deeper trouble is just around the next bend, the claims numbers will almost certainly deteriorate substantially in the weeks ahead. For now, there’s relatively good news in the data.

“It’s pretty clear claims are stabilizing,” says Michael Englund, chief economist at Action Economics. At the same time, “it’s hard to make the case that there’s any upward tilt to growth.”

Growth is weak, but so is the argument that we’re falling off a cliff. “This is a generally encouraging report,” advises Carl Riccadonna, senior U.S. economist at Deutsche Bank. “The fact that the number didn’t back up is a strong sign that the economy is holding in. If the economy were really swooning because of events in Europe, it should be accompanied by a backup in jobless claims.”